Natureís Basket changed its strategy to capitalise on the global Indianís taste for international food. The companyís now poised for growth with its gourmet food stores

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

SECOND NATURE Mohit Khattar realised there was little that could be done if they were in the business of selling vegetables only

In October 2009, nine months after converting the floundering Nature’s Basket into a gourmet food store, its team was pleasantly surprised. Its seven stores in Mumbai had seen sales grow at 70 percent — a surprisingly quick validation of their change in strategy. Getting there, however, has been a rough ride.

Two years earlier, Godrej’s Nature’s Basket business wasn’t going as planned. The store, set up in 2006, had been formed as a result of a simple, yet ambitious plan — to get farmers better prices for their produce. But selling vegetables in cities is a low-margin business at the best of times. Add expensive real estate to the equation and the company was losing Rs. 6 for every Rs. 10 worth of produce sold. “We realised that with vegetables there is only so much you can do,” says Mohit Khattar, chief executive at Nature’s Basket.

Understandably, the top brass at Godrej wasn’t happy. Some of them even wanted the business to be sold off. But Tanya Dubash and her team who had incubated the Nature’s Basket business, were keen to give it another shot. They realised that while the gourmet food opportunity may not be too large, it would give the group a great name and a way to advertise the brand as youthful and vibrant.

It’s a niche that has given Nature’s Basket a new lease of life. The company knew that globally gourmet foods were a $16 billion market and, in time, India would also see consumers shop for exotic spices and flavours.

The turnaround plan came out of a simple observation. Thanks to an increasing number of Indians travelling abroad, a sliver of Indians are experimenting with exotic foods. Shopping for gourmet items as varied as tonkatsu sauce and tuna chunks often meant a visit to places like INA Market in Delhi or Crawford Market in Mumbai. It’s a market estimated at Rs. 6,000 crore to Rs. 6,500 crore by Technopak Advisors. Its growth is pegged at 15-17 percent annually.

The business worked well for the shop owners, but for buyers it meant navigating narrow lanes at these crowded markets. Browsing store shelves was near impossible. Buyers usually went in with a list and walked out with their products. Clearly, there was a gap in the market waiting to be exploited and Nature’s Basket understood this.

The chain, that had begun with a single store in 2006 and had grown to eight in 2009, now has 19 stores across Delhi, Mumbai, Hyderabad, Pune and Bangalore and is on target to clock Rs. 90 crore in sales this fiscal. While profitability is still some time away, stores that are more than two years old have broken even. From Agriculture to GourmetBefore Khattar took over in February 2009, Nature’s Basket was nowhere close to being a gourmet food store. It had started off as the brainchild of Godrej Agrovet, another group company. The initial plan was to take advantage of Agrovet’s links with the agricultural market. The thinking at Agrovet, which had strong linkages with farmers, was ‘why not get fresh produce to cities and help farmers get a better price?’ But selling vegetables in air-conditioned shops didn’t work. A change of plan was required.

The company realised that building a gourmet food chain requires a completely different mindset. As a first step, the business was split from Godrej Agrovet and a separate subsidiary was formed. Along with low-margin vegetables, the stores would stock herbs like basil and rosemary that could be sold at much higher margins.

The company engaged Technopak to suggest changes to the format. After a formal market study, the verdict was simple. “Given the store locations in high rental markets, the company needed to stock products that are space-effective and productive. Essentially, high margin products,” says Saloni Nangia, president at Technopak.

Early on, Nature’s Basket realised that, if managed inefficiently, inventory could prove to be its Achilles’ heel. “The issue with stores like this is that it becomes difficult to understand what sells and what doesn’t. All the margin is lost on items that don’t move,” says Damodar Mall, director, food strategy at the Future Group.

So, Nature’s Basket decided to map out a person’s food needs from the perspective of a gourmet chain. The team realised that they needed to have products that served different needs for different times of the day. So, for breakfast they would stock a pancake mix that buyers would be hard-pressed to find in other stores. Similarly, for snack times, the store would stock a relish or conserve.

Another insight was on range adequacy. A store like Nature’s Basket had to have a wide array of sauces, oils and condiments to draw shoppers in. All along, the company has been careful to keep a sharp focus on only gourmet food. If you tend to stock too much, the store looks like an upgraded supermarket and that takes away from customers’ experience, says Khattar. Thanks to the plan, the company is able to maintain store sizes at 3,000 square feet. This helps it keep sales per square feet at high levels.

For instance, industry sources say that Foodhall, a 13,000 square foot store in Mumbai’s Palladium Mall with an international food section, has the same sales per square feet as a 3,000 square feet Nature’s Basket store. (Per square feet sales, however, are not an indicator of profitability as Foodhall stocks everyday food items that sell faster.)

With this insight, the company addressed other inefficiencies. Direct imports were stopped. With a weak understanding of what sells, the chain noticed they were importing a host of items at the wrong price points. Pastas priced at Rs. 500 lay unsold for months. Getting goods cleared at ports was a problem. The company also had to take on the task of getting the goods to their stores and the loss associated with unsold products. Now, it simply buys products from importers. If unsold, they go back to the importer, cutting the risk for the company.

International FoodsWorking only with importers reduced risk and helped understand what sells. As a result, its stores carry only 18 days of inventory on their shelves.

This has helped them achieve gross margins of 25 percent. “Unlike other retailers, they understand how international food works. They understand organic food, natural food, gluten-free food,” says Harshita Gandhi, director, Tree of Life, an importer of international food products.

She cautions that with the model tested, the company now has to ramp up expansion. For now, Nature’s Basket has chosen an unconventional approach to get customers without advertising. The company understands that this is a business that grows by word of mouth. “In this business you build up customers by the 10s and 20s and not by the 100s,” says Khattar.

Nature’s Basket also does a lot of in-store activities. In Mumbai, the company has roped in prominent food writer Rushina Munshaw Ghildiyal to conduct events at stores. “It’s important to give people a reason to keep coming to the store,” she says. There are cooking classes and wine-and-cheese evenings where high-spending guests are invited. All this helps build a buzz around a store. “It’s a well laid trap,” says Megha Moorthy, a 34-year-old regular, as she walks down the aisles at the Worli store.

For now, Godrej plans to keep adding stores steadily. In about another three years, it is looking at being able to scale to a Rs. 500 crore business, at which point the group might consider a listing. But one thing is certain. “This will never be a mass market business,” says Dubash.

(This story appears in the 17 February, 2012 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)